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Don’t Lose

“Whoever said, ‘It’s not whether you win or lose that counts,’ probably lost.” - Martina Navratilova

“Buy the rumor, sell the fact” is a popular Wall Street expression. This phrase is often used to explain price reversals that occur after an anticipated event has happened. For example, if the market believes the monthly non-farm payrolls number will come out much lower than the consensus of economists estimate, bond traders will likely bid up U.S. Treasury bond prices going into the economic release. However, once the actual number is made public and meets the lower expectations, bond prices sometimes reverse course and decline as expectations were met. Traders who “logically” bought, thinking prices would go even higher after the weak employment report are left hanging, tending to their losses, wondering what went wrong.

This common pattern occurs throughout the market ecosystem. It makes no difference whether we are talking about your favorite technology stock, crude oil, or Mexican Bonos. In the highly competitive financial markets, there is little money to be made in the short-term by meeting expectations. People believe that going with the crowd in many circumstances is usually the least risky option. This may be true for some things in life, however when it comes to investing, it is often the out-of-consensus money manager that tends to produce the desired results.

Jason Zweig, of the Wall Street Journal, recently republished an interview from June 2001 done with Charles D. Ellis that was featured in Money Magazine, “Wall Street’s Wisest Man.” Mr. Ellis is the founder of Greenwich Associates; a consulting firm focused on the financial services industry and is also known for his belief in passive index investing. The interview focuses on Mr. Ellis’s investment philosophy and is as relevant today as it was when it was originally published. I thought with the recent market volatility and the upcoming presidential elections that it made sense to include a couple excerpts below given the fact that investors as a group collectively have a poor track record when it comes to managing their emotions.

Q. So what should investors care about? A. Back in 1963, I was in a training program at Wertheim & Co., and one day the firm’s senior partner, J.K. Klingenstein, was our guest speaker. As he was about to leave, one of the trainees blurted out,”Mr. Klingenstein, you’re rich. How can we become rich like you?” Everyone else was mortified, and J.K. was clearly not amused. But then, his face softened, and you could see that he was taking the question very seriously and trying to sum up everything he’d learned in a lifetime on Wall Street. The room was silent as a tomb, and finally Mr. Klingenstein said firmly, “Don’t lose.” Then he stood up and left. I’ve never forgotten that moment. That’s what investors should really care about: Don’t lose. Don’t make mistakes. They cost too much. Most of the destruction of investment value occurs in small, private, anguishing experiences that are never discussed and never recorded, because people were doing things they never should have done.

Q. You don't mean we should stay out of the stock market because we might lose money? A. That’s not what losing means. In investing, losing means taking decisive action at the worst possible times – being driven by your emotions precisely when you need to be the most rational. Trying too hard to win eventually means losing. To win the Indianapolis 500, you first have to finish the Indianapolis 500... There’s a saying in the British Royal Air Force that investors need to remember: “There are old pilots, and there are bold pilots, but there are no old, bold pilots.”

For most long-term investors that seek success over a lifetime or more, the daily ebb and flow of the market should be of little significance. However it is also undeniable that the financial markets and central bank policy have recently become more politicized. A few weeks ago, Barron’s published two articles – “Hillary Rising” and “Winners and Losers in a Trump Market.” The chart below summarizes how various equity sectors could fare under either a Clinton or Trump presidency according to research done by Evercore ISI. Think about the chart, but also consider that as the probability of winning the election increase for either candidate the financial markets largely price in their economic effect. “Buy the rumor, sell the fact.”

In support of Clinton, Howard Marks of Oaktree Capital is quoted in the “Hillary Rising” article stating, “Most investors probably think they know how the country will be governed if Hillary Clinton is elected, whereas the range of possibilities under Donald Trump seem much wider. Based on the old saying that the market abhors uncertainty, I think the market would react less negatively to Hillary winning than it would to Trump.” I mostly agree with Mr. Marks' view, however many analysts seem to be overlooking their respective tax policies and how this would impact investing. From what I have read, Clinton seems more willing to raise taxes on capital gains. To me this should not be overlooked, as many investments in my opinion would likely be negatively affected if this were to occur. For more information on the candidates respective tax policies please see the following video segment “How do the presidential candidates’ tax proposals compare?” from the PBS News Hour or “Comparing the 2016 Presidential Tax Proposals”published by the Tax Foundation.

Going into the election over the next few months, financial markets will likely prove to be much more volatile than what we became accustomed to during the summer. The best advice I can offer investors is to stay focused on long-term objectives, and try to stay away from consuming too much news. As Jason Zweig of the Wall Street Journal recently wrote, “Most financial journalism, like most of Wall Street itself, is dedicated to a basic principle of marketing: When the ducks quack, feed ‘em... The advice that sounds the best in the short run is always the most dangerous in the long run.”


Justin Kobe, CFA Founder & Portfolio Manager


Advisory services through Cambridge Investment Research Advisors, Inc., a Registered Investment Adviser. Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a broker-dealer, member FINRA/SIPC. Cambridge and Pacificus Capital Management are not affiliated.Material discussed is meant for general illustration and/or informational purposes only, and it is not to be construed as investment, tax, or legal advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon when coordinated with individual professional advice. These are the opinions of Justin Kobe and not necessarily those of Cambridge Investment Research, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Investing in the bond marketis subject to risks, including market, interest rate, issuer credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies is impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Diversification and asset allocation strategies do not assure profit or protect against loss.

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